Part I – Partial transcript of the press briefing Q&A with Legislative Analyst Mac Taylor on California’s fiscal outlook for 2014-15. The press conference was held on Nov. 30, 2013:

Question:
Mac, could you briefly discuss for the Prop. 30 impact here? …There was a long fear that once those taxes went away, structural deficit would return, all of the underlying problem we’ve been dealing with. You’re not seeing that at all?

Mac Taylor:
No, and again, it’s for those two reasons. Because the sales tax – again, the sales tax rates are levied on account of your bases – so the sales tax rates kick off first by a quarter cent and the effect of that is felt over two years. And then after that occurs, the PIT [Personal Income Tax] rates kick off on account of your bases, so you have two fiscal years over which revenues decline.

So if you look at our revenue estimates at what they’re growing at the end of the period, it’s at a fairly low rate…like the average of about 2%. So you do avoid that big cliff effect, because of the way that the tax rates phase out. And you have to look at the revenues to see more of the effect of the revenues falling off. Because we’re looking at the operating surpluses, other trends that I’ve talked about help mask that effect of having revenues phasing down slowly, and that’s primarily that property tax effect I had mentioned. General fund spending is relatively flat. That creates added room that tends to offset the effect of lowered revenues in those years.

Question:
…But it’s important to note for those who’ve sat here for a very long time – the structural deficits. You say here the structural deficit’s gone.

Mac Taylor:
Yes. Now, again, people are going to define structural deficit differently, right? If you’re going to include in your calculations, you need to be paying off unfunded liabilities within a 10 year period, these number would look very differently.

Because we have not statutorily or as a practice included monies to pay off CalSTRS or retiree health, those aren’t in our baseline numbers reflected in those operating surpluses.

So someone could have a different view of what should go into those basic calculations and the numbers would look differently.

We’ve tried to address it through acknowledging that we should start setting aside money.

But the way we’ve done the calculations based on our historical practice, the operating surpluses are fine.

Question:
But if we don’t start paying down the debts and we don’t build the reserves like you’re suggesting, we will have the cliff when these two taxes go away because we will not have that cushion. Or am I mistaken?

Mac Taylor:
Well, again, it’s hard because you’ve got different things floating around here – the decisions that you might make. What we’re saying is the cliff effect isn’t really there in part because it’s phased out over four years. You’re not going to see a dramatic cliff effect. Let’s call it a step-down effect. And that means that not all of a sudden revenues decline, it’s just that the growth rate would step down. Instead of growing at 5% a year, you might grow at 4% and 4%. Instead of growing at 5% with the PIT rates go off, you’re growing at 2% and 2%.

So you don’t have the sort of dramatic cliff effect that people think when you go from $120 billion in that out year to $100 billion. Maybe you go from $120 billion, you’re going to grow to $125 billion, you grow to $121 billion.

So you would not have had a large cliff effect it’s just that if you look at revenues.

Countering that, though, are these other factors with the property tax growth that tends to offset it, and that’s why you’re not seeing…

Question:
But we don’t have the growth…

Mac Taylor:
If you don’t have the growth because of an economic slowdown? Those numbers are going to look different.

Question:
You mentioned the property tax growth is included in the projections. Why are you expecting such a growth in property taxes?

Mac Taylor:
Well, two basic reasons. I mean, first of all, we’ve had very low property tax growth rate given the sort of housing problems that we’ve had. Sales have now picked up dramatically. Home prices are much higher. They’re on average 25% or more since the last 18 months. So now, when you have sales, you have property values that are growing, you get more revenues. We also project that building will resume in the next few years and get back up to more traditional levels – multi-families, single-family homes. When you have that growth, you get a nice bump because you’ve got all this new value that you’ve captured right away. So, like I said, we’re forecasting sort of underlying property tax revenue growth of around 7%, which is fairly normal by historical standards but we haven’t seen those for a long time.

Question:
Have you factored in the property taxes that [inaudible]…presumably reducing demand for housing?

Mac Taylor:
Yes, I mean, we’ve tried to do that through our demographics and through our assumptions about what those home sales would be. So we have much lower population growth, for example, now. It’s more, I think, in the .7 or .8 range. In the past, it would have been in the 1.2 to 1.5 range. So we have tried to take that into account.

Question:
It’s been a very good year for the markets obviously, but I think a lot of people think the market’s inflated right now. I mean, how quickly do your surpluses start to recede if the market kind of tails out or starts going down in the next few years?

Mac Taylor:
Well, we talk about that in the document that market values, we don’t think, are out of line when we look at various metrics that are judged…It’s not out of line like it was in the dot-com boom, and so we did try to take those things into account.

We don’t forecast it to continue to sort of grow rapidly. In fact, we take the level that the market in the S&P 500 is at right now or recently, we assume it stays relatively flat for several months and then grows only slowly less than even the pace of the economy.

So, we have tried to take that into account. But your question is still a good one – what if does turn down, interest rate starts to rise because the Feds change their monetary policy, that the market depresses? Those can always happen. And that’s again, why we’ve given priority towards being careful about the additional commitments you make in the near term and using those monies that we see coming in those operating surpluses to give the reserve a very high priority. But it is a good question and one we’re concerned about.

Question:
Getting back to the property taxes. I know, talked to some assessors who talked about there would be a slingshot effect coming out of the recession because people were able to get reassessments from their base year values down to much lower rates and those can come up at the full increase in market value value up until it gets back into base year. Is that part of the growth that you see?

Mac Taylor:
I think we’ve tried to incorporate that in our estimates. He’s talking about the so-called prop rates where you went below market value, you don’t increase it just 2% until you get back up to your original assessed value. And so we have tried to build that in. It’s just one of the more factors that complicate trying to –

Question:
You see that it’s a relatively minor factor in the –

Mac Taylor:
I would say so. It is a piece but, yeah, not a crucial factor. You’ve got all these different things going on with the redevelopment, for example. We’re still getting the benefits for the phase out of redevelopment where the annual amounts coming in from that are going to grow over the period too. So that and the triple flip and just underlying growth probably swamp that effect, but it’s a piece.